Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

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Other payments. Payments made by the

Services rendered or to be rendered.

Inventory items. Inventory items are not just

partnership to a retiring partner or successor in

stock-in-trade of the partnership. They also in-

interest of a deceased partner that are not made

These rights must have arisen under a con-

clude the following property.

in exchange for an interest in partnership prop-

tract or agreement that existed at the time of

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Property that would properly be included

erty are treated as distributive shares of partner-

sale or distribution, even though the partnership

in the partnership’s inventory if on hand at

ship income or guaranteed payments. This rule

may not be able to enforce payment until a later

the end of the tax year or that is held

applies regardless of the time over which the

date. For example, unrealized receivables in-

primarily for sale to customers in the nor-

payments are to be made. It applies to payments

clude accounts receivable of a cash method

mal course of business.

made for the partner’s share of unrealized re-

partnership and rights to payment for work or

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ceivables and goodwill not treated as a distribu-

Property that, if sold or exchanged by the

goods begun but incomplete at the time of the

partnership, would not be a capital asset

tion.

sale or distribution of the partner’s share.

or section 1231 property (real or deprecia-

If the amount is based on partnership in-

The basis for any unrealized receivables in-

ble business property held more than one

come, the payment is taxable as a distributive

cludes all costs or expenses for the receivables

share of partnership income. The payment re-

year). For example, accounts receivable

that were paid or accrued but not previously

tains the same character when reported by the

acquired for services or from the sale of

taken into account under the partnership’s

recipient that it would have had if reported by the

inventory and unrealized receivables are

method of accounting.

partnership. For more information, see Partner’s

inventory items.

Income or Loss, earlier.

Other items treated as unrealized receiv-

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Property held by the partnership that

If the amount is not based on partnership

ables. Unrealized receivables include poten-

would be considered inventory if held by

income, it is treated as a guaranteed payment.

tial gain that would be ordinary income if the

the partner selling the partnership interest

The recipient reports guaranteed payments as

following partnership property were sold at its

or receiving the distribution.

ordinary income. For additional information on

fair market value on the date of the payment.

guaranteed payments, see Transactions Be-

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Notification required of partner. If a partner

Mining property for which exploration ex-

tween Partnership and Partners, earlier.

exchanges a partnership interest attributable to

penses were deducted.

These payments are included in income by

unrealized receivables or inventory for money or

the recipient for his or her tax year that includes

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Stock in a Domestic International Sales

property, he or she must notify the partnership in

the end of the partnership tax year for which the

Corporation (DISC).

writing. This must be done within 30 days of the

payments are a distributive share or in which the

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transaction or, if earlier, by January 15 of the

partnership is entitled to deduct them as guaran-

Certain farm land for which expenses for

calendar year following the calendar year of the

teed payments.

soil and water conservation or land clear-

exchange. A partner may be subject to a $50

Former partners who continue to make guar-

ing were deducted.

penalty for each failure to notify the partnership

anteed periodic payments to satisfy the

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Franchises, trademarks, or trade names.

about such a transaction, unless the failure was

partnership’s liability to a retired partner after the

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due to reasonable cause and not willful neglect.

partnership is terminated can deduct the pay-

Oil, gas, or geothermal property for which

ments as a business expense in the year paid.

intangible drilling and development costs

Information return required of partnership.

were deducted.

When a partnership is notified of an exchange of

Payments for Unrealized

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partnership interests involving unrealized re-

Stock of certain controlled foreign corpora-

Receivables and Inventory

ceivables or inventory items, the partnership

tions.

must file Form 8308. Form 8308 is filed with

Items

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Market discount bonds and short-term ob-

Form 1065 for the tax year that includes the last

ligations.

day of the calendar year in which the exchange

If a partner receives money or property in ex-

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took place. If notified of an exchange after filing

change for any part of a partnership interest, the

Property subject to recapture of deprecia-

Form 1065, the partnership must file Form 8308

amount due to his or her share of the

tion under sections 1245 and 1250 of the

separately, within 30 days of the notification.

partnership’s unrealized receivables or inven-

Internal Revenue Code. Depreciation re-

On Form 8308, the partnership states the

tory items results in ordinary income or loss.

capture is discussed in chapter 3 of Publi-

date of the exchange and the names, ad-

This amount is treated as if it were received for

cation 544.

dresses, and taxpayer identification numbers of

the sale or exchange of property that is not a

the partnership filing the return and the trans-

capital asset.

Determining value. Generally, the sales

feree and transferor in the exchange. The part-

This treatment applies to the unrealized re-

price of unrealized receivables, or their value if

nership must also provide a copy of Form 8308

ceivables part of payments to a retiring partner

received in a distribution treated as a sale or

(or a written statement with the same informa-

or successor in interest of a deceased partner

exchange, is determined by any arm’s-length

tion) to each transferee and transferor by the

only if that part is not treated as paid in ex-

agreement between the buyer and the seller (or

later of January 31 following the end of the

change for partnership property. See Liquida-

between the partnership and the partner receiv-

calendar year or 30 days after it receives notice

tion at Partner’s Retirement or Death, earlier.

ing the distribution).

of the exchange.

For a sale or exchange of a partnership

If no agreement exists, the price or value

The partnership may be subject to a penalty

interest before August 6, 1997, inven-

must be determined by taking into account both

of up to $50 for each failure to timely file Form

tory must be substantially appreciated

CAUTION

the estimated cost to complete performance of

8308 and a $50 penalty for each failure to fur-

before it generates ordinary income (rather than

the contract or agreement and the time between

nish a copy of Form 8308 to a transferor or

capital gain). This also applies to any sale or

transferee, unless the failure is due to reasona-

the sale or distribution and the time of payment.

exchange under a written contract that is in

ble cause and not willful neglect. If the failure is

effect on June 8, 1997, and at all times thereaf-

intentional, a higher penalty may be imposed.

Example. You are a partner in ABC Partner-

ter before the sale or exchange. For the defini-

See the form instructions for details.

ship. The adjusted basis of your partnership

tion of “substantially appreciated,” see Certain

interest at the end of the current year is zero.

Statement required of partner. If a partner

distributions treated as a sale or exchange

Your share of potential ordinary income from

sells or exchanges any part of an interest in a

under Partnership Distributions, earlier.

partnership depreciable property is $5,000. The

partnership having unrealized receivables or in-

partnership has no other unrealized receivables

ventory, he or she must file a statement with his

or inventory items. You sell your interest in the

or her tax return for the year in which the sale or

Unrealized receivables. Unrealized receiv-

partnership for $10,000 in cash and you report

exchange occurs. The statement must contain

ables include any rights to payment not already

the entire amount as a gain since your adjusted

the following information.

included in income for the following items.

basis in the partnership is zero. You report as

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The date of the sale or exchange.

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ordinary income your $5,000 share of potential

Goods delivered or to be delivered to the

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ordinary income from the partnership’s depre-

extent the payment would be treated as

The amount of any gain or loss attributa-

ciable property. The remaining $5,000 gain is a

received for property other than a capital

ble to the unrealized receivables or inven-

asset.

capital gain.

tory.

Page 17

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 17

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